Thursday, 17 October 2013

MONGOLIA: Mining--The Conflict over Profits

The construction of a huge mine in the middle of the Gobi Desert was supposed to catapult Mongolia toward rapid economic growth. But an ongoing conflict over profits from the gold and copper mined there threatens to capsize the young democracy.

Mongolia is over four times the size of France, with nearly 3 million inhabitants and a GDP of $10 billion (€7.5 billion) in 2012. British-Australian mining corporation Rio Tinto employs 71,000 people in more than 40 countries and is worth about $60 billion.

These two unequal partners -- a poor, potentially rich nation and the second largest mining corporation in the world -- have joined together to mine one of the globe's largest deposits of copper and gold. But will they be capable of distributing this wealth fairly?

The mine in question lies an hour's flight south of the Mongolian capital Ulan Bator, near the border with China. There is enough copper in the ground here to build the Statue of Liberty more than 800,000 times over. Once the planned mine goes into full operation, it could increase the country's GDP by a third. It could, at least in theory, bring prosperity to this country where many people still live in simple yurts and huts. But in practice, the transaction between this global corporation and this country that is poor but rich in raw materials looks quite different. In fact, the project serves as a prime example of what is happening in a growing number of newly industrialized and developing countries.

Here we have a weak country that needs the help of a business that is economically far more advanced to tap its own natural resources. One side has raw materials everyone wants; the other has the necessary technical expertise, as well as a great deal of money and smart lawyers. How can the inexperienced country benefit from this relationship without being taken advantage of? And how can the government of this frail democracy explain to its people that in the coming boom years, a few people will get rich very quickly, while most stay poor?
The conflict surrounding the Oyu Tolgoi mine, which is named for the turquoise-colored copper ore found in the Gobi Desert, began about four years ago. In order to acquire a 34 percent share in the mine's construction, the Mongolian government had to take out a loan. This loan came from Rio Tinto, the company that operates the mine. When news of that deal emerged, people in Mongolia started asking who will ultimately get more out of the mine, Mongolia or Rio Tinto.

So far, the people of Mongolia haven't benefitted from the mine. The Mongolia government deal with Rio Tinto hasn't been a fair one. This is how things have gone all along. The government accuses Rio Tinto of breaking agreements and rejects the company's future plans for financing the mine.
How this dispute ends will have a decisive impact on Mongolia.

The country, whose economy has been growing faster than almost any other, is almost entirely dependent on the export of raw materials. Mongolia has things everyone wants -- coal, copper, gold, uranium, rare earth minerals -- and that potential wealth is reflected in the high-ranking visitors it draws. Donald Rumsfeld has been to Ulan Bator, as have German Chancellor and several Japanese prime ministers. Beijing especially is making an effort to reach out to its northern neighbor.

One hundred percent of the materials from Oyu Tolgoi are exported to China. This July, four years after the mine's construction began, the first flat-bed trucks set out from Oyu Tolgoi to China, each bearing 36 tons (36,000 kilos) of a brown, cement-like powder, from which copper and gold would be extracted on the other side of the border. It was a historic day, whose date had been postponed several times. Geophysicist Sanjdorj had begun to fear he wouldn't get to experience it before his retirement.

In the mid-1990s, shortly after the release of those Russian maps, Australian mining giant BHP obtained the first mining license for Oyu Tolgoi and spent several years digging for copper deposits. In 2000 the Australian company lost interest for good, selling its license to Canadian mining company Ivanhoe for about $40 million. The price of copper at that point was $1,700 per ton, a quarter of its value today.

Ivanhoe's founder, American mining tycoon Robert Friedland, had made a great deal of money through a project mining nickel in Canada and a copper mine in Burma. He continued the drilling at Oyu Tolgoi and soon reached his goal, when geologists found a kilometers-long, banana-shaped copper deposit that extended as far as 2,000 meters into the earth and had a very high copper content. Now Friedland just needed people with the skills and means to excavate that banana.

In 2006, Rio Tinto bought shares in Friedland's company. By early 2012, when the corporation took over the majority, miners had dug more than 1,000 meters into the earth, and thousands of workers had conjured a small city out of the Gobi Desert, with an airport, a track for vehicles and power lines connecting the mine to China. The price of copper at this point was over $8,000. So much investment was pouring into the country that for a time its economy was growing at a rate of more than 17 percent.

But when Mongolia held parliamentary elections in June 2012, the victorious Democratic Party, until then only the junior party in a coalition government, found itself gazing into yawningly empty government coffers. How could that be? Why hadn't the country earned its share during the boom?
The main problem is the loan. Rio Tinto has exceeded the mine's originally estimated construction costs of $5 billion by hundreds of millions of dollars. Rio Tinto managers' salaries are too high and that the company deducts consulting and materials costs that don't make sense.

Because the Mongolian government committed to bearing 34 percent of all the mine's costs, as costs rise so do the country's debts with Rio Tinto. It will take Mongolia decades to pay back the loan. Mongolia expected to see the first dividends on the mine in 2019. But it turns out it will be 20 or 30 years before it receives a share of the profits.

Rio Tinto vehemently denies having broken any contracts. The costs, the company says, are only $786 million higher than agreed upon with the government in a 2009 feasibility study. "By any measure, this is effective cost management for a project of this size," says a representative for Rio Tinto. Besides, he adds, the government has received "over $1.1 billion in taxes, fees and pre-payments so far," with the corporation paying more taxes in Mongolia than in many other countries where it operates mines.

That the government can't get its budget under control and fails to distribute the country's resources fairly can hardly be blamed on Rio Tinto's managers. It is more likely due to incompetent, corrupt government employees such as the former head of Mongolia's Mineral Resources Authority, who was sentenced to several years in prison.

Still, the language used by foreign mining company managers who like to regard the country as a "cash flow engine," as well as the non-transparent deals they conduct, are increasingly turning the Mongolian people against them. As the protests grew louder, the country's cabinet froze all licenses that had already been issued. Last year, when a foreign company wanted to sell a coal mine to a Chinese corporation, Mongolia's new government temporarily halted all foreign strategic investment in the country.

Environment Minister Oyun describes herself as a staunch economic liberal, but believes that in the case of poor but resource-rich countries such as Mongolia, liberalism needs some limits. "It isn't good to make yourself dependent, whether on a large neighboring country, on a company or on natural resource price cycles."

In late July of this year, the price of copper was around $7,000. Under the shimmering sun of the Gobi Desert, Rio Tinto's drilling machines had surrounded half of Oyu Tolgoi's banana-shaped deposit with a dense network of tunnels and shafts. Another seven years and a further $5 billion would make this the world's most modern copper mine, extracting ore from every shaft and making its owners rich.
At least, that's what the company's stockholders thought until last month, when the British-Australian corporation suddenly halted work, saying the Mongolian government had announced that not only the cabinet, but the parliament as well, needed to approve funding for the mine. That didn't just sound like a threat, it was a threat. Shortly after the company's announcement, raw materials analyst Tony Robson warned that, "Mongolia's reputation for mining investment has been destroyed."

Later last month, the government tried to calm mining investors' worries: "Parliament has already made the decision and signed their agreement," Prime Minister Altankhuyag Norov said at a press briefing. Not even the cabinet would have to be involved. "All issues can be discussed and decided at the board of directors level," he explained. The tug-of-war between the poor, rich country and the corporation will go on.